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Here's What the Distribution of Wages Looks Like in America

Where do you stand?

On the basis of gross domestic product, the United States is still the greatest country in the world. The 2015 Global Wealth Report from Allianz found that the U.S. retained 41.6% of the world's wealth, followed in a distant second by China at 10.5%. America's consumption-driven economy does a really good job of creating opportunities for businesses to grow and prosper.

America's wage distribution in one chart

This drive of the American economy to expand is none more apparent than the 2015 wage statistics culled by the Social Security Administration (SSA) from more than 160 million people in the labor force. If you earned wages in 2015 that required you to pay the FICA tax, or you wound up netting payment from a deferred compensation plan, you're included in the SSA's wage statistics data.

In total, $7.145 trillion in compensation was earned during 2015 and subject to federal income taxes. Another $273.7 billion was also paid out by deferred compensation plans, such as a pension or a retirement plan (e.g., 401(k)). After exclusions, some $7.42 trillion in net compensation was paid to Americans in 2015.

Let's take a closer look at what this data looks like when broken down by net compensation interval:

Income inequality is a major concern

America may be a land of opportunity, but what the above graph might fail to show is that it's also home to some serious wealth inequality. Allianz, which referred to the U.S. as the "Unequal States of America" in its report, used its proprietary wealth Gini coefficient (a measure of wealth inequality where 0 represents perfect equality and 100 perfect inequality) to demonstrate the gap in wealth between the rich and the poor. In 2015, Allianz calculated America's Gini coefficient to be 80.56. This implies a high concentration of wealth in the hands of just a few people. Though Sweden was a close second, Allianz's findings placed the U.S. at the top of the list in terms of highest wealth inequality.

Wealth inequality is usually bad news for the economic growth prospects of a country. The big issue revolves around lower-income citizens having limited pathways by which to climb the socioeconomic ladder.

For instance, receiving medical care and getting a college education are two issues the well-to-do don't have. With money not an issue, access to medical care and a college education to obtain a well-paying job are readily available. Lower-income individuals and families may not have the luxury of being able to afford health insurance, and they may not be able to go to college due to its cost. With a college degree becoming something of a requirement in the workplace, lower-income folks are finding it difficult to climb out of a financial hole.

According to the wage statistics data from the SSA, just 1.26% of all workers earned $250,000 or more in 2015, yet net compensation earned by this small sliver of people equaled to approximately $1.1 trillion. That's in the neighborhood of 15% of the total net compensation earned by American workers in 2015. Conversely, the median wage was slightly below $30,000.

Image source: Evan Guest, Flickr.

Will wealth inequality get worse under Donald Trump?

Arguably the biggest question as we look ahead is whether income inequality will lessen, stay the same, or perhaps even increase, during the Trump presidency. If the initial analysis conducted by the Tax Foundation of Trump's revised tax plan offers any indication, income inequality may worsen over the next decade, allowing the rich to get richer.

Trump's revised tax proposal aims to cut individual and corporate income taxes, as well as substantially simplify most facets of the U.S. tax code. For starters, he'd reduce the current federal income tax schedule from seven brackets ranging from a low of 10% to a high of 39.6% to just three tiers of brackets (12%, 25%, and 33%). Second, corporate income tax rates would fall from 35%, which is among the highest in the world for developed nations, to just 15%. The last key component is a corporate tax repatriation holiday rate of 10% to encourage U.S. multinationals to bring the roughly $2.5 trillion held in overseas profits back home.

Image source: Pixabay.

The goal of President Trump's tax proposals is to put more money in the pockets of working Americans as well as corporations. Since the U.S. is such a consumption-driven economy, the assumption is that this extra capital will boost GDP growth. Based on dynamic assumptions (i.e., a model that factors in the effects of all aspects of Trump's tax reforms on the economy), the Tax Foundation predicts GDP growth of between 6.9% and 8.2% over the next decade.

However, their model also finds a substantial benefit to the top 1% who would see their peak marginal tax rate fall to 33% from 39.6%. On a static basis (i.e., not including the impacts of Trump's tax reforms on the economy), the top 1% of Americans would see their after-tax incomes rise by 10.2% to 16% over the next decade. By comparison, the bottom 60% of wage earners would see their after-tax incomes rise by a paltry 0.8% to 1.3%.

Even keeping in mind the likelihood that Trump's tax reforms will probably face changes in Congress, there's a pretty good chance that the wealth gap is going to widen during the Trump presidency.

Author

A Fool since 2010, and a graduate from UC San Diego with a B.A. in Economics, Sean specializes in the healthcare sector and investment planning. You'll often find him writing about Obamacare, marijuana, drug and device development, Social Security, taxes, retirement issues and general macroeconomic topics of interest. Follow @TMFUltraLong